Why Cathie Wood's Ark Invest Thinks Valuation Of Automakers Appear Stretched

Cathie Wood-run Ark Invest forecasts the auto industry's unit volume to grow over the next five years, while it expects the enterprise value of automakers to shrink.

Unit Volume- EV To Diverge: The number of light vehicles sold globally was 78 million in 2021, Ark analyst Sam Korus said. The combined enterprise value of the automakers stood at $3.5 trillion, he added.

Over the next five years, auto sales will increase at a compounded annual growth rate of 4.7% to 98 million units in 2026, market research firm IHS estimates, the analyst said.

Korus, however, sees enterprise value slipping about 20% to about $2.8 trillion. Enterprise value is a valuation metric of companies, and it makes use of market capitalization, along with short-term and long-term debt and cash on the balance sheet.

If autonomous taxi services are pressed into service, unit vehicle sales will likely drop 8% to 72 million, the analyst said. Under such a scenario, the analyst sees the enterprise value plummeting 60% to $1.3 trillion.

Related Link: Cathie Wood Trims Stake In This Warren Buffett-Backed Automaker And Laps Up Another $5M In Tesla

Why The Anomaly? Korus noted that historically, unit sales are considered a good proxy for enterprise value growth in the global auto industry.

The analyst highlighted two profound shifts happening in the auto industry – a shift from ICE vehicles to electric vehicles and a shift from human-driven to autonomous vehicles.

"If our assumptions for electric and autonomous electric vehicles are correct, then today's $3.5 trillion in global automaker enterprise value seems to be discounting a much higher margin profile for the industry than it has achieved in years," Korus said.

The industry, according to the analyst, faces risk, as autonomous platform providers "extract value at the expense of hardware manufacturers' margins."

Even if autonomous does not scale, the industry could still be overvalued, as consumer shift toward EVs accelerates.

Related Link: Cathie Wood Cuts Another $32M From Tesla Stake — Initiates Position In This Legacy Automaker Instead

Photo: Courtesy of Steve Jurvetson on Flickr